India's Bond Market Advancement: Expanding into Global Indices and More
India's bond market has experienced significant changes and is currently undergoing a transformation. Historically, India was the only major emerging market that did not include global securities in global bond indices. While India fully opened its equity market to foreign investors in 1993, there has been a debate about opening the bond market to foreign investors due to concerns about the potential impact on the currency market due to large money inflows and outflows.
Several developments have taken place to address this issue:
Consolidation of Investors: Qualified Foreign Investors (QFIs) and Foreign Institutional Investors (FIIs) have been merged into a single category known as Foreign Portfolio Investors (FPIs).
Quantitative Limitations: Quantitative limitations on the number of foreign purchases of Indian government bonds have been revised.
Voluntary Retention Route and Fully Accessible Route: The government has adjusted ceilings and introduced routes such as the Voluntary Retention Route and the Fully Accessible Route, allowing investors to purchase Indian bonds without restrictions.
These changes have been driven by several factors:
Inclusion in Global Indices: India has been under consideration by index managers like JP Morgan and FTSE for inclusion in global bond indices, similar to its status in the MSCI Emerging Market Equity Index for stocks.
Global Indices Balance: The exclusion of Russia from some global indices due to the Russia-Ukraine War created imbalances, leading investors to advocate for the inclusion of India in these indices because of its liquidity and investor interest.
Announcements: These developments occurred between September 2020 and October 2021, with JP Morgan typically making its annual index review announcement in September.
Key statistics related to India's bond market:
The Indian government-securities market is estimated to be worth 86 lakh crore.
FPIs hold around 59,000 crores of fully owned bonds through the Fully Accessible Route, along with 82,000 crores of non-FAR bonds.
Foreign investors currently own only 1.6% of the total G-Sec pool, approximately 1.41 lakh crore.
The forecast is that foreign investment in Indian bonds will reach $18.5 billion over the next decade, raising foreign ownership to 9% by 2031.
Implications of these changes include:
- A decrease in bond yields.
- A reduction in the cost of capital.
- Positive effects on stocks due to increased purchasers and lower capital costs. Potential pressure for the Indian rupee (INR) to appreciate.
- Bridging the savings-investment gap at competitive rates.
- The inclusion of India in global indices could lead to a one-time inflow of $30–40 billion USD and annual inflows of $15–18 billion, making it a significant milestone for India's entry into global indices, similar to China's inclusion.